If you are unable to make your mortgage payments and are facing foreclosure, the worst thing you can do is ignore the problem. Some people assume that they can delay the process by doing nothing. That is not the case. Do not delay. Start by trying to negotiate a solution with your lender or by calling a U.S. Consumer Finance Protection Bureau (CFPB) counselor. You may be able to negotiate a lower interest rate, a temporary reduction in payment, or an extension of the loan term. If there is little hope of resuming payments and reinstating the mortgage, consider negotiating for a short sale, in which the lender allows the sale of the property for less than the amount owed on the mortgage. A lender may also accept a deed-in-lieu-of-foreclosure, with which the owner transfers the house to the lender with no further liability. If the situation is truly desperate, consult a bankruptcy attorney.
If you are unable to negotiate a solution, consult a lawyer. Do not become involved with a “foreclosure rescue” company. These companies often make very attractive offers to take over your mortgage and allow you to continue to live in your home while you get back on your feet financially. Many are fraudulent and will use the title to your house to refinance and disappear with the money.
Keep in mind that when you purchased your property, you likely signed both a mortgage or trust deed, which imposed a lien on the property and enables the lender to foreclose, and a promissory note. The note makes you personally liable and gives the lender the right to pursue payment through your other assets, for example, by garnishment of wages. Do not just walk away from a property without consulting an attorney about your liability.
Foreclosure differs from state to state. If you are in a state that permits non-judicial foreclosure, the lender can cause a foreclosure sale simply by providing notice. This is also called “power of sale” or statutory foreclosure. There is no requirement that the matter go to court. If the borrower has a defense, the borrower must file a lawsuit challenging the foreclosure and requesting that the judge “stay” (delay) the foreclosure suit.
In 22 states, foreclosures are typically accomplished through civil lawsuits and judicial foreclosure orders. The borrower receives a foreclosure complaint and notice of a hearing. In most cases, the hearing is very short because the judge need only determine that the debt is valid and that the borrower is in default. Most borrowers do not dispute those facts but only want to discuss why they are unable to pay. Unfortunately, loss of a job, illness, and similar situations are not legal defenses. If the borrower has a legal defense, the borrower must properly raise and prove it.
Foreclosure laws are very complex, and the lender may have made a mistake in the process. A mistake in giving notice or in the timing may be a defense if it is not a harmless error, such as a misspelling.
The lender may also have made mistakes before initiating foreclosure. For example, mortgages are commonly sold, and the owner of the debt often uses a separate company to “service” the loan. The privately-owned Mortgage Electronic Registration System (MERS) tracks the servicing rights and ownership of mortgages and sometimes assigns rights without recording the change in local property records. With multiple companies involved, borrowers sometimes send payments to the wrong company and are sometimes charged fees and penalties that were not authorized by the documents they signed. The company servicing the loan may have credited payments incorrectly or may have incorrectly calculated the amount that is required to reinstate the mortgage. The company that initiated foreclosure may not be able to prove that it owns the loan.
Many of the mistakes can be fixed, so bringing them to the attention of the court will only cause a delay and not prevent foreclosure. The same is true of the Servicemembers Civil Relief Act, discussed below. That delay can be used to try to sell the property, negotiate with the lender, or seek other solutions.
Under the Servicemembers Civil Relief Act, 50 U.S.C. 501, active duty military personnel have special protections in foreclosure and other court proceedings. In a non-judicial foreclosure state, the Act may require the lender to go to court. In court proceedings, the service member may contact the court with proof of active duty and request a stay in the proceedings and even request the appointment of an attorney. The Act gives the courts flexibility to protect the service person.
It is also possible that a mortgage was tainted from the beginning. In rare cases, a mortgage may be “unconscionable” because it is so unfair that it is “shocking.” Such situations typically involve people who are unable to protect their own interests, such as people with limited English or limited ability to read, who were not represented by a lawyer, and who were pressured into signing a one-sided agreement that contained an unusual term.
More commonly, the mistake involves a federal or state statute. These statutes provide for a number of remedies, including, in some cases, to cancel or rescind the mortgage. The Truth in Lending Act, 15 U.S.C. 1602, requires that lenders make certain disclosures about costs and payments in the original loan documents and make those disclosures at specific times. To examine the required documents, visit the CFPB website. The Act has been amended and has been implemented by rules that provide special protections for borrowers in high-cost loan situations and those using home equity lines of credit. Some states also have special protections for people facing foreclosure. Consult your state’s consumer protection bureau for further information.